A risk appetite swell seems to have saved the safe haven dollar from making a significant, bearish shift. While that may seem initially counterintuitive to our normal fundamental expectations, it makes a little more sense when we look at the greenback’s breakdown. From basic risk trends, we find the solid S&P 500 rebound didn’t materially advance its bull trend. Furthermore, the Risk-Reward Index (a fundamental measure of return versus volatility) was equally uncommitted to a strong move. As such, where the AUDUSD was showing gains; the speculative appetite behind carry wasn’t robust enough to leverage pairs like EURUSD and GBPUSD higher. The positive correlation between the Dow Jones FXCM Dollar Index (ticker = USDollar) and equities is one borne from a lack – rather than abundance – of risk commitment.

Japanese Yen Rally Fails to Evolve Into Trend as Uncertainty Reigns

The technically-impressive rally from the Japanese yen (drop in yen crosses) to start this week ran out of energy quickly, as expected. Forcing a technical break on tight price congestion – like USDJPY’s below 94.00 or EURJPY below 120 – is a high probability outcome given the market conditions. With a market that is broadly active and with heavy yen-based event risk ahead tempering market depth, it becomes easier to break technical boundaries. Follow through, on the other hand, requires more than a lack of participation. Notably absent in the yen’s move Monday was a substantive fundamental driver. That deficiency has caught up the currency and disgruntled more than a few breakout traders. To keep the yen moving through the immediate future, we need one of two factors. More difficult to muster would be a sharp reduction in stimulus expectations heading into the Bank of Japan’s (BoJ) policy meeting on Thursday. Yet, given Governor Kuroda’s verbal commitments and suggestions of scrapping a stimulus cap rule; that is unlikely to catch. The other option is for a strong risk aversion move…

British Pound Breaks Down Across the Board

Without doubt, the pound was the weakest currency amongst the majors Tuesday. A 125-pip drop for GBPUSD back from key resistance at 1.5250 offered a sound benchmark for a universal drop on the day. However, there were other, more remarkable moves – such as the GBPNZD’s dip to record lows. What instigated this abrupt drop? The fundamental docket offered a few economic updates, the most remarkable of which was the March manufacturing activity report which fell short of the expected series improvement (the 48.3 read still show sector decline). Aside from this, rate speculation was steady. Without a clear and material drive, this bear trend will struggle to develop.

Euro Weak as Fundamental Deteriorate, Kranjec Skeptical on Slovenia

Amid a disappointing round of fundamental data, unflattering headlines from Cyprus, Spain’s admission of further fiscal trouble and fear-mongering for Slovenia, there was little chance that EURUSD would make a decisive move above 1.2875. Nethereless, the market-wide Euro stumble wasn’t of the magnitude that suggests a new fundamental trend has been established. Looking over the developments on the day, news that the unemployment rate in the Eurozone hit a fresh record high of 12 percent should surprise no one. The Italian budget deficit through March hitting its fastest stride in at least a decade is concerning though. Far more interesting was ECB member Kranjec’s unflattering economic outlook for Slovenia (-1.9 percent GDP in 2013) and blunt call for government action contradicts reassurance that the country will not pose a systemic threat. Meanwhile, Spain’s admittance that it missed its deficit target by a wide margin slowly revives fear of region-wide issues.

Australian Dollar: Look to AUDNZD for Assessment of RBA Decision

There was material fundamental potential in the Reserve Bank of Australia’s (RBA) rate decision this past session, but the central bank wasn’t looking to jump start speculative ambitions. Looking beyond the announcement that the benchmark rate would be held at 3.00 percent (fully expected), the masses were combing through the comments that accompanied the policy decision to assess the probability of further easing later down the line. Retained was key commentary that suggested inflation offered the scope for possible further rate cuts. This inherently avoids a shift to ‘neutral’. Some believe that the policy outcome was somehow hawkish and thereby bullish. However, when we look at AUDNZD – which pits one investment currency against another – we see there is little weight to this claim. AUDUSD’s move was superficial risk trends.

New Zealand Approaches 0.8500 but Bond Rally Cools

The New Zealand dollar is an ‘investment currency’, and thereby global market participants migrate to it when they are seeking out higher yield. Risk appetite Tuesday was tangible, but conviction is still lacking. However, where there is questionable demand for the standard investment assets, there has been a more committed demand for the kiwi and its debt. The capital inflow is evident in the NZDUSD’s revived move towards 0.8500 as well as AUDNZD’s extended 265 pip drop (high yield versus high yield). However, that individual strength may soon run out of steam. Looking at the New Zealand benchmark 10-year government bond, an aggressive 6.3 percent drop in yields come on a remarkable influx of demand. Yet, Tuesday, that momentum all but collapsed. Once again, the kiwi will fall back on traditional risk trends to find its bearings.

Gold Suffers Largest Drop in Six Weeks as Dollar Gains

As expected, one extreme begets another. Last week, gold cut a range that was less than $25 and the one-week average daily trading range (ATR) through Monday reflected the lowest level of activity since September 2010. The tourturous chop was finally broken this past session with a dramatic 1.5 percent tumble – the biggest since the precious metal snuffed out its strong, February bear leg back on the 20th of the month. Traders who have been reinvigorated by this swell in volatiltiy, however, should consider the fundamental and market conditions before jumping in on the expectations of a full fledged trend. Beyond the consideration that $1550/25 has stood as remarkable support for over a year-and-a-half, we don’t have the standard drivers to keep the bearish pressure on. Dollar strength contributed to the metals slip this past session, but a strong run from the greenback requires dedicated risk aversion trends. Meanwhile, we still have an expected upgrade to global stimulus levels coming later this week with the BoJ, BoE and perhaps even the ECB. If that currency devaluation is realized, it supports gold.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.Learn forex trading with a free practice account and trading charts from FXCM.